Strategies for Wealth Creation - Strengthening Company Control

December 2023

There are many strategies in existence that try to keep control effective within a company, but most of them can be grouped into four broad buckets.

First, companies can issue multiple classes of shares with differential voting rights, such as giving insiders multiple votes per share while offering non-voting shares to outside investors. Additionally, holding companies or limited partnerships are often established, allowing key stakeholders to retain control while still attracting external investment.

Second, protecting against changes in controlling shareholders is vital for safeguarding the company's interests. This can be achieved through mechanisms like the right of approval, which requires existing shareholders to approve any increase in ownership or control. Pre-emption rights also play a key role, granting current shareholders the option to purchase new shares before they are offered to outsiders, thus preventing a loss of control.

The third approach focuses on strengthening the position of existing shareholders. Companies can take steps such as reserved capital increases, where new shares are issued to existing shareholders, or share buybacks, which reduce the number of outstanding shares in the market. Mergers or alliances with other companies can also help consolidate control. Furthermore, employee shareholding programs and shareholders' rights plans (commonly known as poison pills) are used to defend against hostile takeovers, ensuring that loyal shareholders maintain their influence.

Finally, companies can exploit legal and regulatory protections as an additional safeguard. For instance, voting caps limit the number of votes any one shareholder can cast, and strategic assets, such as intellectual property or key subsidiaries, can be shielded from outside influence. Change of control provisions in critical contracts can also make takeovers more challenging, ensuring that important aspects of the business remain under the control of current management or committed shareholders.

Different Share Classes

In the modern corporate world, companies often seek ways to strengthen shareholder control, especially when founders or key stakeholders wish to maintain influence over their company's decision-making even as they bring in external investors. One of the most common strategies for achieving this goal is the use of different classes of shares. By creating different share classes, a company can bifurcate the management control from financial control and offer unequal distribution of voting rights, dividends, and return of capital in case of winding up. It allows the founders or insiders to have control over the company despite their economic stake being less than that of other shareholders.

A share capital company can have a number of classes of shares with varying rights. These classes can be described in any manner but a common method is to use alphabetical descriptions, such as Ordinary A Shares, Ordinary B Shares, Ordinary C Shares, and so forth, depending upon the number of classes that a company decides upon. These can differ in a variety of significant ways, including on the rights to vote, rights to dividends and rights to a return of capital upon winding up.

Probably one of the most powerful of the various classes of shares is the non-voting share. This is often utilized in family-run businesses, or in businesses with EMI schemes where not all investors or stakeholders require voting rights. In fact, by issuing non-voting shares, the founders or main shareholders retain the control of the key decisions while still being able to let external investors provide capital. In such a structure, the founding shareholders would hold voting shares, while new investors would hold shares with only dividend rights.

This approach will allow founders or insiders, even if they do not own the majority of the equity in the company, to retain decision-making powers over the direction of the company, especially regarding decisions on merger, acquisition, or strategic investment issues.

Another common use of multiple share classes is to provide differentiated dividend distributions. Where a company issues only one class of shares, all shareholders would normally receive the same dividend per share. The creation of different classes of shares allows the firm to distribute various levels of profits to different classes of shareholders. For example, a firm may issue preference shares, which have priority in receiving dividends over other classes of shares.Preference shares generally promise a fixed rate of return and, as such, offer security for some investors by often forgoing their right to vote. This allows companies to compensate investors with predictable returns without affecting the governance structure of the company.

Another important advantage of issuing multiple classes of shares is the protection of existing shareholder positions in the event of a liquidation or winding-up of the company. A company can offer a new class of shares to shareholders that provides them with a specified amount, or a preferential return, of their investment in case the company is wound up. Or a class of share can have no right to return of capital, or the right to return may be limited to a particular percentage of the remaining assets.

Several leading companies have used dual-class share structures to retain control with founders or key insiders while enabling the raising of capital with publicly traded shares. Alphabet Inc. (Google) Class A shares, on the one hand, are publicly traded and carry one vote each. Class B shares are held by founders and insiders; each share provides ten votes but is not publicly traded. Last but not least, Class C shares are publicly available but carry no voting rights. That provides founders Larry Page and Sergey Brin with substantial control over the business and its direction, despite the small ownership of equity in it.

Similarly, Meta uses a parallel structure: Class A shares, which are publicly traded, have one vote each, and Class B shares, owned mainly by Mark Zuckerberg and a few select insiders, have ten votes each. This system enables Zuckerberg to control strategic decisions at the firm while still being able to raise capital by issuing Class A shares.

Berkshire Hathaway has a class structure that includes highly priced Class A shares with huge voting powers and dividends, while Class B shares are cheaper, including minimal voting rights and a smaller portion of dividend allocation. This class structure makes investing in the corporation easier for even the smallest of investors without diluting its overall governance.

The reality, though, is that multiple-voting shares are a powerful instrument. The share structure would permit the minority group of shareholders-founders or insiders-to maintain control in governance notwithstanding owning very minor underlying percentage ownership in the company as a whole. These have become particularly prevalent in technology firms and new companies where owners would like to remain in control as long as they have a concept and strategic orientation.

Holdings

Holding companies remain one of the most significant features of corporate organization, especially in achieving the concentration of control over a group of subsidiaries. A holding company is usually a parent corporation possessing enough voting stock in another company, or companies, to control its policies and management. They are usually used to handle investments, protect assets, or maintain control of an empire without direct ownership of operational assets. Yet, while holding companies have certain advantages, the holding companies can build some intricate multilevel shareholding structure, which is usually hard to disentangle. One of the main advantages of a holding company involves its capability of concentrating control while having relatively less financial stake. For instance, an investor could hold 51% in a holding company, which in turn is the owner of 51% of another holding company, which holds 51% in an industrial firm. Even if he has just 13% of the capital in the latter, as would be derived from this cascade ownership, he already has control of it. Such an arrangement allows shareholders to retain practical control of a company and scatter the minority shareholders at different levels in the corporate hierarchy. In the event the industrial company is listed on the stock exchange, it would be difficult for minority shareholders in the holding companies to sell their stocks or exert their influences in decision-making.

Other benefit involving a holding company is usually tax efficiency. For example, the level of personal income tax rates is normally much higher than that applied to dividends paid by subsidiaries. The use of a holding company would mean a controlling shareholder may draw off dividends from operating companies with minimal tax burden, then utilize the same dividends for reinvestment in, or the purchase of additional shares within, the industrial company. In this manner, the result might well be increased consolidation of control in an expanded, profitable business empire.

However, it also has a less positive side, especially in its capacity for abuse of minority shareholders. Holding companies can create situations where there is little or no power or influence that the minority shareholders in subsidiary companies may have, especially if the parent company holds the majority voting rights. This can raise friction and even legal disputes when big shareholders feel they have been disenfranchised, or the holding company structure is viewed as an avenue to extract value from subsidiaries without adequate compensation of the other stakeholders.

Such cases are highly prevalent in Europe: for example, the Exor holding company controlled by the Agnelli family shows well how it is possible, by holding a minority stake in each of its individual subsidiaries, to exert an effective and relevant control on the strategic and managerial guidance over diversified business operations. By means of Exor, several firms, such as Fiat Chrysler Automobiles-now Stellantis-and The Economist Group, among others, are controlled. Through Exor, however, the Agnelli family has been able to maintain control over these investments by holding voting shares in Exor and wielding their power to exercise influence on the underlying companies, even while holding a relatively small percent of shares in each operating company.

Exor does this by utilizing a cascading structure that lets the Agnelli family control a host of companies while holding relatively low direct equity stakes. This structure allows for huge influence over the companies in which Exor invests, while at the same time reducing the amount of capital required to maintain such control. In many ways, Exor acts like a gateway to allow the family to exercise control of businesses in everything from automobiles to media-a real show of flexibility and strength in how holding company structures can maintain influence across sectors.

The Bolloré Group is a large French multinational controlled by Vincent Bolloré and represents one of the more sophisticated ownership structures that have been utilized to control a large number of firms with the controlling party holding only a minority of the outstanding shares. The Breton Pulley is the key to this approach, a complex financial engineering arrangement relying on interlocking shareholdings, family-controlled vehicles, and special voting rights. This combination allows the Bolloré Group to engage in effective governance and influence through its far-reaching portfolio in the media, advertising, and telecommunications, where strategic control is considered substantial for long-term success.

From the peculiar ownership structure of Bolloré Group, one of the most important singularities is the use of voting rights as a way to keep control. Given that the company holds minorities in all its major groups, including Vivendi, Havas, and various telecommunications companies, the Bolloré family still remains influential in the company. This is achieved through special voting rights in addition to cross-shareholdings. Family members have shares that carry more voting powers than those owned by the public or other investors. By concentrating this voting power in their hands, the Bolloré Group is in a position to control the key strategic decisions with a less-than-majority equity stake.

The cascade ownership structure is another important characteristic of the Bolloré Group strategy. The Bolloré family has developed control through a series of holding companies in a complex web of subsidiaries at various levels. This multi-layered arrangement creates an interlocking network where the influence of the family cascades upwards from one holding company to the next, giving them effective control over giant multinational corporations. While outside investors may own shares in the operating companies, the family makes sure their dominance is ensured in critical decision-making processes.

The Bolloré Group is also controlled via a dual-class share structure, which provides the family and its allies with greater voting powers compared to other shareholders. That is where, under such structures, family shareholders' votes carry more votes per share compared to that held by the general public. This accordingly grants the Bolloré family the right to make critical strategic decisions, such as mergers, acquisitions, or other major corporate actions, without being outvoted by outside investors. In fact, such large control of voting shares by them allows them to retain their leadership even if they do not hold the majority financial interest.

Two very good examples of the control of the Bolloré Group through such sophisticated mechanisms are its holdings in Vivendi and Havas. The case of Vivendi is a multinational media conglomerate wherein the Bolloré Group has been able to hold immense influence due to interlocking shareholdings and special voting shares. It is a minority owner but dictates the strategic direction of the company in such matters that involve media assets or investments. By the use of special voting shares, they have been able to lead the company through critical decisions on mergers, acquisitions, and content creation.

Similarly, the Bolloré Group significantly influences Havas, which is one of the largest advertising companies in the world. Through layers of complex ownership, a mixture of voting power may enable the Bolloré family to make decisions on major matters that affect Havas's strategic direction and management policies. This level of control, with minority shareholding, speaks to efficiency from its intricate structure of cross-shareholdings and preferential voting rights. Through these mechanisms, the Bolloré Group demonstrates how appropriately structured ownership can guarantee the long-term control of large industrial groups.

A more sophisticated way of control through holding company use is the so-called Breton Pulley, a financial engineering system that gained widespread publicity in Europe during the 1980s. Conceived by Antoine Bernheim, a banker from Lazard, the Breton Pulley involves creating a cascade of holding companies, each using financial leverage to maintain control of an industrial company with minimal capital. This system was particularly useful in Europe, where capital markets were relatively shallow compared to those in the United States, allowing entrepreneurs to control vast business empires without the need for significant capital investment.

The two most significant entrepreneurs who availed themselves of the Breton Pulley were Bernard Arnault and Jean-Charles Naouri, both of whom created vast empires through holding companies and financial leverage.

The most spectacular successes in using the Breton Pulley have been to the top of the luxury goods industry dominated by Bernard Arnault. During the early 1980s, Arnault was running a small property company, Ferret-Savinel with very limited assets. Guided by Bernheim, however, Arnault seized control of the dormant subsidiary of retail group Boussac Saint-Frès, Christian Dior, through the Breton Pulley system. Because Arnault was able to leverage this acquisition, he was using Dior as a means to expand further into the luxury goods market.

Arnault's strategy for empire building involves the use of debt to buy high-quality assets in the luxury sector, which is marked by strong pricing power, high margins, and low competition. He went on to use his controlling interest in Christian Dior to acquire other prestigious brands and, through a series of mergers and acquisitions, formed the LVMH group, now the largest conglomerate in the world in the luxury goods market, with an annual revenue of €80 billion.

The case of Jean-Charles Naouri and the Breton Pulley serves as a counterpoint, underlining the risks of too much debt and the wrong assets. A former civil servant and Rothschild banker, Naouri started his journey in the late 1980s by buying the ailing retailer Rallye. He used a series of debt-laden holding companies to gain control of Groupe Casino, a leading French convenience store chain. With a stake of only €100 million in the top holding company, Naouri was able to control a business that at its peak had a market capitalization of €4 billion.

But it was a tale with a dramatic twist when the operational challenges facing Groupe Casino became insurmountable. It included aggressive competition from independents such as Leclerc, the development of discounters like Aldi and Lidl, and the Internet. This competition caused cash flow to decline, whereas indebtedness began to build. "The Breton Pulley", once a powerful engine of growth, started to become a curse: high and rising indebtedness began to interact with low and falling profitability in a vicious circle. This set up a vicious circle that finally culminated in a default in 2019, and the saga appears to be near its conclusion with the suspension of trading in Rallye debt and Casino stock.

Holding companies and the financial strategies underlying them, such as the Breton Pulley, are powerful levers to control business empire with limited capital. But, as the diverging fortunes of Bernard Arnault and Jean-Charles Naouri most eloquently attest, there are also risks inherent in such strategies. The secret of long-term success will lie in debt management, in choosing quality assets, and in adapting to market fortunes. Holding companies can be an excellent way to exert control and to expand, but they can expose investors to extreme financial risk if not handled with care.

Limited Partnerships

A limited share partnership is an arrangement that fully separates the financial ownership of a venture from its management. In an LSP, though the share capital of the company is divided into shares, there exist two different kinds of partners, namely limited partners and general partners. This will be able to create a different type of dynamics with respect to control and liability.

1. Limited Partners: They are considered to be more like shareholders, their liability is only the amount they invest within the company. They do not participate in the daily operations or management of the business and are not considered to hold any key position in the management of the business. Their stake is purely monetary, and as far as profits made by the business, the same accrues to them but in case of management decisions; they are never accorded such an opportunity.

2. General Partners: These are the owners who have the responsibility for managing the company and have unlimited liability towards the debts of the company. General partners usually include senior executives or key persons in the company. The general partners, unlike the limited partners, have the right to operate and manage the company, take decisions, and run the operations. In most cases, the general partners play the executive roles while the limited partners are merely passive investors who do not participate in either management or decision-making.

Ownership and control are sharply separated in a limited share partnership. That is in contrast to a traditional public company where there would be shareholders entitled with voting rights, which have the potential of influencing management decisions; an LSP structure allows the general partners to retain complete control over the operations of the company, even if the limited partners own the majority shares. It gives an extremely interesting ownership and management combination, which attracts investors, especially when they want strong, centralized control.

Probably the most famous use of a limited partnership structure in modern business is Berkshire Hathaway, the multinational conglomerate controlled by Warren Buffett and Charlie Munger. Although Berkshire Hathaway itself is a corporation, the two famously used limited partnerships as part of their early investment strategy. These allowed them to pool capital from investors while maintaining complete control over the decision-making process and management of their investments.

The best example of a limited partnership in action would be Buffett Partnership Ltd., the investment vehicle used early in Warren Buffett's career. It allowed Buffett to attract outside capital, whereby he had total control over the portfolio and the investment decisions. In addition, because Buffett structured his investment operations as a limited partnership, he was able to charge fees for managing the pooled funds and independently make investment decisions in order to grow his wealth. This structure was instrumental in scaling his operations to make him an influential figure in investing.

As Buffett's wealth grew and his operations became more sophisticated, he moved onto a more orthodox corporate structure: Berkshire Hathaway. However, that influence of a limited partnership model remained. The model of Berkshire Hathaway continued to reflect elements from the LSP structure most especially in letting Buffett and Munger retain their control over company investments even after the company went public.

In a limited share partnership, management control is not derived from the financial ownership common in public limited companies but instead emanates from the company's by-laws or articles of association. It is these legal documents that provide for how executives are selected, their powers, and how they can be removed. General partners are usually the firm's top managers, who possess the broad powers to act for the firm, making every needed decision in all circumstances. Indeed, they can only be removed from their jobs as provided in the by-laws, which makes them uniquely secure and independent.

Ownership will also be continuous even though ownership might change because the ownership structure is a continuity with company management. A father, for example, can step down as owner and leave a holding company controlling it but appoints his son to serve as the general partner and operate the business, hence allowing a continuation of management independent of a shift in ownership and also the management principles or philosophy and strategic policies can persist over long period.

Some general partners may also want to further limit their personal liability by forming a family holding company, adding another layer of separation between personal wealth and business risk. This not only protects the individual partners but also ensures that even if they do not own the majority portion of the company's equity, the management control stays in the family or small group of trusted individuals.

The structure of LSP has been one widely adopted by several major European companies to manage their businesses. Examples of such well-known companies are Merck, Michelin, and Hermès, which have all applied limited share partnerships to balance the separation of ownership and management, with the families behind them still holding considerable control. It is the LSP structure that is very appealing for companies who want to retain the vision and legacy of their founders and make a smooth transition of power to the next generations without diluting the control.

For instance, in the case of Hermès, the family behind the luxury brand has retained an overwhelming influence in the company with a limited partnership structure. Despite the fact that the company is publicly traded, the family's management control has remained intact: the general partners-the family-make critical decisions on the strategy and future direction of the brand. Such a structure lets the family take a long-term view on the company, unfettered by the short-term pressures often brought about by shareholder activism.

A limited share partnership represents an important feature: a unique combination of ownership and management control, not common in more traditional corporate structures. An LSP allows business firms to enjoy high management autonomy even when the financial ownership is highly dispersed, thanks to clear demarcation between limited partners and general partners or shareholders and executives. This can be well worth the price in industries where leadership continuity, long-term strategies, and protection from outside pressure are paramount.

For investors such as Warren Buffett, the limited partnership model provided the flexibility and control required to build an investment empire. In family-run companies like Hermès, it lets the legacy and vision of the founders live on for generations. Separation of ownership and control accompanying an LSP model is a powerful tool that companies could use to balance the interests of those with financial interests in the company with effective management.

Control Shareholder Changes

Among the issues of corporate governance, the protection of the integrity of shareholder structures, as well as the prevention of undesirable shifts in control, are some of the most important concerns to many companies, especially those with dispersed ownership, like family-owned businesses. With these concerns in mind, certain mechanisms are often written into a company's articles of association in order to manage changes in shareholder composition. Two major instruments of control over changes in shareholders are the right of approval and pre-emption rights. Both types of clauses grant existing shareholders the right to block or have an influence on the transfer of shares with the view to maintaining ownership among trusted owners.

Right of Approval

The right of approval, in general, is a mechanism that companies institute in the articles of association to control or regulate who should become a shareholder. It essentially gives the company the power to block any shareholder from selling their shares to an undesirable party. This mechanism has been very much helpful in family businesses or companies where the balance between shareholders is delicate and needs to be protected against external influence or hostile takeovers.

Technically, the right of approval clause states that any shareholder wishing to sell their shares must seek the approval of the company first before selling. The company has a certain time to decide on the sale. If it fails to do so within that time, then the approval is considered granted by default. On the other hand, if the company refuses, it, or any third party designated, shall purchase the said shares at a price to be mutually agreed by the parties or, in the event of disagreement, such price as determined upon an independent appraisal. This helps to ensure control of who can hold shares in the company and that any change in ownership is aligned with the interests of the company.

The pre-approbation right, however, does not always apply. Shares disposed of between the shareholders themselves or to family members (spouse, ascendants, or descendants) are very often exempt from the operation of this approval, to make smoother the transfer of shares within a family or between close partners.

Pre-emption Rights

Similar to the right of approval, pre-emption rights serve as another tool for companies to control the shareholder structure change. It provides shareholders with a prior right to purchase offered shares in priority over any sale to a third party. Normally, companies whose shareholders want either to increase their stake or avoid the acquisition of an external investor controlling a majority use pre-emption rights.

Essentially, pre-emption rights allow the shareholders to "buy out" any shares that are on sale and ensure that the control and ownership of the venture stay with the existing stakeholders. Similar to the right of approval, such rights are also not exercised in cases of transfer of shares among family members or in certain other cases, such as liquidation of marital property.

Pre-emption and right of approval rights are powerful tools to control change of shareholders for stability in the governance structure. When included in the articles of association of a company, it defeats any undesirable external influence and preserves the status quo of the relative positions in shareholders' power.

Strengthening the Position of Current Shareholders:

Reserved Capital Increases

Other ways of securing the position of the existing shareholders, and guard against the changes in ownership include the issuance of new shares. It is more commonly referred to as a reserved capital increase. The companies use this method as a dilution strategy of voting power or influence from outside, primarily activist shareholders who seek to force management or corporate strategy changes.

Companies can dilute the stakes of either an activist investor or a potential hostile acquirer through the issuance of new shares to existing shareholders or friendly parties and, therefore, maintain control over their governance. The new issue of shares could be an effective defense mechanism against outside interference, in particular in those cases where the management of the company feels threatened by the potential of a hostile takeover or significant changes to the company's strategic direction.

The right of approval, pre-emption rights, and reserved capital increases are some of the mechanisms that a few well-recognized companies have used to protect their governance structure against external threats. A few examples are discussed below:

The most famous cases of a company using shareholder control mechanisms to fend off an external threat were between LVMH and Hermès. In the early 2010s, Bernard Arnault, the chairman of LVMH, started building a significant stake in Hermès, raising fears that LVMH might attempt a hostile takeover of the luxury goods company. In response, Hermès used a reserved capital increase strategy by issuing new shares to family members who already held stakes in the company. This diluted relative ownership of LVMH and gave Hermès' family a free hand to run the company. Eventually, LVMH divested part of its shareholding in Hermès as part of an out-of-court settlement, and the luxury brand remained independent.

In 2016, after the sacking of Cyrus Mistry as chairman of Tata Sons, his family firm Shapoorji Pallonji Group sought greater representation in the governance of Tata Sons. On the other hand, the management led by Tata Sons sought to restructure the company by converting it from a public limited company to a private limited company through the issuance of new shares to Tata trusts or any other friendly parties, thereby reducing the Mistry family's influence. Although the restructuring plan did go on to diminish the powers of the Mistry family over Tata Sons, the situation created legal battles and public controversy over changes in governance.

In 2012, Canadian mining company First Quantum Minerals had an activist investor named Clive Newall, who was pushing for changes in the board. The company countered this by issuing a block of new shares to a friendly party and diluted Newall's stake in the company. That had the effect of defeating Newall's threat of reaching an influential position in the company that would allow him to challenge the board of directors of the company and thereby retain the current group's control in the company.

Strengthening Control Through Share Buybacks and Cancellations

A family holding company may strengthen its control over an operating company through various financial strategies. The most common method is share buybacks and cancellations. This involves the company repurchasing a portion of its outstanding shares, with the intention of cancelling them afterward. Consequently, the overall number of shares in the market decreases, while the percentage ownership of nonparticipating shareholders increases. This can be a way for the family or any existing controlling shareholders to increase their ownership of the firm without having to increase their investment.

Share repurchases and retirements can also be a defense mechanism strategy for activist shareholders. Activists often seek either to change the management or the strategy of a firm. Buybacks can shrink the relative voice of activists. The aim is usually to reduce the numbers of outstanding shares to consolidate voting power among existing friendly shareholders or to dilute the activist's relative stake in the company and hence weaken their voice. This is especially useful when the company wants to prevent a hostile takeover or minimize the power of outside investors who can insist on changes.

Many companies have begun to adopt share buybacks and cancellations as corporate strategies to strengthen their positions and deflect demands from activist shareholders. One such remarkable case of companies is Peugeot, a French multinational manufacturer of automobiles. The Peugeot family regularly practices buying their company's shares to increase their grip within the concern. They increase ownership by repurchasing and cancelling existing shares without taking extra shares from the market. This process has helped the Peugeot family increase influence in the concerns and decisions about the company, especially amidst external investors' moves to claim a greater stake.

The most prominent example of share buybacks as a response to an activist's demands is the case of Apple Inc. in 2013-2014, when investor Carl Icahn urged the company to utilize part of its tremendous cash pile for wide-scale share repurchases. He was of the view that this would help in giving a push for shareholder return and shoot up the stock price, benefiting all investors. Apple's response included the aggressive buyback of billions in shares, which it then retired. While the buyback was not specifically defensive, associated moves responded to shareholder desires, and importantly it curtailed Icahn's options and imposition of additional demands: with outstanding shares reduced, earnings per share grew to dampen some of the activist pressure.

Japanese conglomerate Toshiba came under intense pressure from activist investors, including Effissimo Capital Management, in 2020 for greater governance say. Succumbing to the pressure, Toshiba announced a blockbuster ¥700 billion, or about $6.3 billion, share buyback program in an effort to consolidate control while returning capital to shareholders. Offloading the business provided Toshiba with temporary relief from activist scrutiny but underlined the company's ongoing governance challenges. Share buybacks often work well as a short-term remedy, but they clearly do not eliminate the external pressures altogether.

Unilever was also under high scrutiny in 2018 after a failed takeover attempt by Kraft Heinz in 2017. Bowing to pressure from activist investors, including Trian Fund Management, Unilever announced a €6 billion share buyback and cancelled the shares repurchased. This was all part of the wider plan for shareholder value improvement while at the same time tempering the demands for aggressive restructuring. This repurchase program helped Unilever to regain control over the strategic direction and shareholder concerns and thereby re-strengthened the management and ownership structure from external pressures.

Share buybacks and cancellations have been a powerful tool for corporations in improving the ownership structure of their companies. By repurchasing and cancelling shares, they increase the relative ownership of existing shareholders, specifically the owners or persons in control, at the expense of either activists or any potential hostile acquirers. This strategy is very common for family-controlled companies such as Peugeot but also as a defense against activist investors as illustrated by the cases of Apple, Toshiba, and Unilever. In any case, share buybacks may offer temporary respite from external threats and concentrate control, often needing supplementation through other governance measures over time to protect a company's strategic direction and independence.

Mergers and Other Tie-Ups

It also demonstrates that mergers and acquisitions are not only means or methods adopted by firms in view of expansion, diversification, and accomplishment of strategic and industrial objectives; however, they represent an important anti-takeover device employed by firms interested in maintaining control of their company. Talking about capital control, a merger has been serving closely analogous to a reserved capital increase either in the case of hostile shareholders diluted or by acquiring friendly investors for reinforcing management with supplemental and fresh owners. But there is a risk in this approach: the new shareholders who were brought in to support existing management may, over time, try to take control of the company themselves.

Mergers can be an effective defense against activist shareholders because the change in ownership structure and the concentration of control can circumvent the activist shareholders. A few cases demonstrate how mergers have been used as a defense against unwanted shareholder activism.

In 2014, Allergan received a hostile takeover bid from activist Bill Ackman's Pershing Square Capital Management and Valeant Pharmaceuticals. The drug maker decided to defend itself by announcing a merger with a much bigger pharmaceutical firm called Actavis. This move not only made the market value of Allergan rise but also reduced Ackman's power and saved the company from the takeover.

In 2014, Carl Icahn also forced Family Dollar to accept the higher bid of Dollar General over that of Dollar Tree. However, the management of Family Dollar went ahead and merged with Dollar Tree on grounds of possible antitrust issues with Dollar General. This $8.5 billion merger weakened the power of Icahn, aligned with Family Dollar's long-term strategy, and positioned the company well in the market.

Another case involved Jos. A. Bank, which was forced by activist hedge funds to accept a takeover bid from Men's Wearhouse in 2014. That finally materialized in a $1.8 billion deal that created not only a far stronger combined entity but also a distraction from the activists that management could focus on: integrating operations.

More recently, in 2021, Dell Technologies succumbed to activist pressure from hedge funds that were pushing for a less complex financial structure. Rather than bowing completely to pressure, Dell decided to spin off VMware but still kept a strategic partnership with it. This would satisfy the shareholders while allowing Dell to keep a tight grip on VMware's operations-a feat of balancing shareholder demands with strategic objectives.

Employee Shareholdings: Strengthening Corporate Independence

In companies intending to remain independent from activist shareholders or hostile takeovers, an employee shareholding program is one strong weapon. The desire to provide staff with an ownership opportunity may forge a loyal band of shareholders, naturally aligned with management in defending any company from undue influence. As employee-shareholders are generally more concerned about the long-term prospects of their companies rather than short-term gains, they would naturally agree with any management decisions taken to protect the strategic direction of the company.

In practice, there are a number of strategies through which a company can safeguard its interests and protect itself from activist investors. A number of companies take on ESOPs, through which companies distribute shares in ownership to their employees. In the process, organizations not only reduce the bargaining power of outsiders but also generate a more caring and dedicated work group. Such alignment could help in many ways for better growth and sustainability of the company.

One of the best examples of this was at United Airlines back in 1994. The airline was in serious economic problems and faced a threatened hostile takeover. Concerned about their precarious ownership structure, United's management decided to take a bold step: it implemented an ESOP that gave 55% of the company's shares to employees, primarily pilots and mechanics. In exchange for their dramatic ownership exposure, employees granted wage concessions and agreed to cost-saving measures designed to right the financial ship at United. This move effectively made the employees the majority stakeholders. This increased their level of support for management decisions and strengthened its defenses against takeover attempts. The example of United Airlines shows how a strong employee shareholding force can act as a strong barrier to any external pressures while strengthening the independence of the company's identity.

In 2003, Samsonite, too, received increasing pressure from activist investors regarding its financial results and restructuring efforts. These investors aimed to influence the company's strategic direction, jeopardizing management's control. In response, Samsonite initiated an employee shareholding program, enabling employees to acquire shares at attractive terms. This strategy aimed to cultivate a loyal group of shareholders aligned with management’s vision, thereby countering the activist investors' influence. At a difficult juncture, Samsonite had put in place a strong ownership base among employees, stuck to its governance structure, and kept focusing on its long-term strategic goals.

Another example is that of Avis Budget Group in 2012. The company was threatened by the activist hedge fund SRS Investment Management, which wanted changes in operations and the board makeup to satisfy the short-term interests of this shareholder class at the possible expense of stability in the management strategy. In an effort to counterbalance such pressure, Avis put a focus on broadening employee ownership and strengthening stock ownership incentives for top employees and executives. This approach aligned the goals not only of employees but also strengthened governance, through which it became more difficult for the activist investors to impose their agenda. By placing a strong focus on employee ownership, Avis developed internal dedication to long-term success and diminished outside meddling.

Apart from the deterrence against activist investors, employee shareholding programs often have exciting tax benefits. These tax benefits that come with such programs make them very popular for companies and their employees, to create wealth by the success of the company in which they work. Once employees start taking an interest in the business, they unite by working together for a common objective, and their goals become completely aligned with the success or failure of the company.

Poison Pills

Other methods the firms could employ are the shareholder rights plan, famously known as the poison pill. It helps in preventing undesirable build-up of stock via severe dilution for any shareholder whose overall share purchase exceeds the certified level without board prior approval. These approaches when successfully applied tends to have the effect of leaving the companies free to operate with stability with a long-term vision and thus remaining independent of any undue influence.

In general, under a shareholder rights plan, if a shareholder acquires a certain percentage of the company's shares-a threshold such as 20 percent-existing shareholders are given the opportunity to acquire additional shares at a discount. This would dilute the acquiring shareholder's interest and make the takeover attempt substantially more costly. It forces the potential acquirer to negotiate directly with the board, prior to further stock purchases, in order to ensure that the board retains control of the takeover process.

While shareholder rights plans can be contentious and are even prohibited in some jurisdictions, they are a strong tool for companies wanting to maintain their independence from hostile takeover attempts. These plans can shift the power from external shareholders back to the board, giving the company more control over its own destiny.

Golden Shares: A Strategic Instrument for Safeguarding National Interests

The golden shares are one of the strategic instruments utilized for safeguarding national interests in certain strategic sectors, as described by law, related to national security and public order. In several countries, the industries usually not exposed to foreign control or hostile takeover include media, finance, and defense. These protections often take the form of a class of shares called golden shares, which give the holders, generally a government or founding agency, the ability to block major corporate decisions, though the holder may possess only a minority of the total shares outstanding in the company.

It is especially important when control over resources, operations, or infrastructure becomes relevant in terms of the sovereignty of a nation. Golden shares could thus be an effective tool for governments to block foreign entities from taking control of key companies, should the geopolitical climate call for it.

For instance, in Germany, Lower Saxony maintains a golden share in the capital of Volkswagen AG to provide protection for the company against hostile takeovers and preserve regional control of its activities. With about 11.8% of Volkswagen's ordinary shares, that gives Lower Saxony immense blocking power on the most important decisions, for example, when it comes to mergers and relocations. This has been achieved through the Volkswagen Law, which requires 80% approval from shareholders for major changes in corporate structure and ensures that the company preserves the employment factor locally and protects the long-term interests of Volkswagen as a pivotal economic player in the region.

Similarly, Italy has golden shares in Eni S.p.A. and Enel S.p.A. to keep the government's oversight intact over vital energy infrastructures. These golden shares give the government the right of veto over major corporate activities with the aim of keeping strategic resources under national control. This way, Italy protects its energy assets from foreign influence to ensure stability and security in the energy sector.

The UK government has a golden share in Rolls-Royce Holdings, which is quite central to the nation's defense and aerospace industries. That share gives the government the right to block foreign takeovers that might affect national security-a protection ensuring key defense capabilities, such as aircraft engines, remain under British control.

Last but not least, in the aerospace industry, the French, German, and Spanish governments held golden shares in Airbus until recently. An ownership structure of this kind gives these countries the right to control major decisions, and it protects European interests in the competitive world of aerospace. The continued presence of such golden shares preserves European autonomy and cements Airbus's place as a key player in Europe's industrial strategy.

From this, it is evidential that golden shares are not only a financial instrument but also a means of protection and preservation by the governments with respect to their national interests in vital industries.

While golden shares have proved a necessary tool for safeguarding the national interests of many countries, their validity has been questioned, especially under EU law. The EU has also expressed misgivings on the consistency of golden shares with the principles of free markets and competition. According to certain quarters, golden shares violate the shareholders' rights and constitute entry barriers to foreign investors, thus frustrating the free flow of capital within the EU economy.

Some governments, in response, have adjusted their golden share practices to conform to the EU, while others have battled on behalf of maintaining this tool for protecting national security and welfare. In that regard, a struggle continues among those countries weighing between a sense of national control of industries vital to the economy and their desire to embrace open market policies.

Voting Caps

In the realm of corporate governance, companies often employ various strategies to shield themselves from the threat of hostile takeovers and from the overwhelming influence of large shareholders. One notable method is the implementation of voting caps. This approach, while seemingly at odds with the principle of "one share, one vote," which asserts that each share should provide equal voting power, aims to cultivate a more balanced governance structure.

For instance, Volkswagen AG in Germany is subject to a special legislation, which limits every shareholder to no more than 20% of the voting rights regardless of the total number of shares owned. So-called Volkswagen Law was created for the purpose of preventing hostile takeover and maintaining the power of the regional government called Lower Saxony, which is a major shareholder of Volkswagen:. This has made the voting cap play a very vital role in ensuring the company's independence, where no single shareholder can have too much control.

In France, for instance, the conglomerate Lagardère Group-which has a major stake in media and publication-has imposed a 7% cap on the voting by each shareholder. This will help prevent the rise of one strong investor in corporate decisions and also defend the company against hostile takeover bids. But this has raised controversy among investors who are interested in earning more voting rights and thus more say.

In the United Kingdom, Sky plc had a voting cap in place before Comcast acquired it, which restricted any shareholder's voting rights to 37.5%. This restriction was designed to prevent any one entity, namely 21st Century Fox, from gaining too much power in the company. Although the voting cap was eventually lifted in the midst of a competitive bidding war, it had previously served to strike a balance of power among shareholders.

Portugal Telecom also adopted a voting cap of 10% to stabilize its corporate structure against hostile takeovers, but this provision was later removed under regulatory pressure after it had served its purpose during a particularly vulnerable period.

Apart from voting caps, change of control provisions in key contracts are also one of the common corporate devices to prevent hostile takeover. This means that apart from joint ventures and distribution contracts, all major contracts which would be invalidated in case of a change of control over the company will not be affected. For this reason, strategic assets, such as patents, brand names, and key subsidiaries, are usually subject to such provisions that make takeover extremely difficult since the control over the parent will shift.

A well-known example is the merger agreement between Tiffany & Co. and LVMH in the year 2020. Tiffany had included a change of control provision, which means the company could terminate the deal if circumstances were hostile. That would provide a defense against unwanted takeovers. This provides extra defense so that strategic interests may be upheld by Tiffany during negotiations.

Other Methods

Several other methods are still out there to maintain the shareholder's control. Unusual tools and techniques include

Non-core asset divestiture: It is a plan of the company where the organizations streamlines all operations and develops concentration on the most profitable areas of the business. A company can reduce its size by selling non-core parts of the business and subsequently concentrates on the core activities, which will make the company resistant to hostile take over and exogenous shocks. One of the most impressive examples of this strategy utilization is General Electric. During the past couple of decades, GE has sold the biggest part of its business, for example, its financial services unit known as GE Capital and its appliance division to the Swedish giant Electrolux. In this way, GE has concentrated on what it is best at-that is, aviation and power generation-and reduced its complexity and risks.

Similarly, Ford Motor Company was able to execute this strategy when it sold most of its non-core assets, such as its holdings in Aston Martin and Jaguar Land Rover, in the early 2000s. In particular, such a focused approach strengthened Ford's balance sheet and cleaned up its operations to make the company less vulnerable to outside forces and concentrate on its core automobile products.

Another way companies insulate themselves from hostile actions is through staggered boards, otherwise known as classified boards. This corporate governance structure allows for only a portion of the board of directors to be elected at any one time. As such, it becomes much more difficult for an acquirer or activist shareholder to quickly gain control of the board. Alphabet Inc., the parent company of Google, is a good example. A staggered board would allow Alphabet to retain some control and influence in strategic decisions in light of shareholder activism, as only a portion of the board would stand for election at any one time. PepsiCo also has a staggered board structure. This helps the company fend off pressure from outside investors and activists looking to alter the strategic course of the company. Continuity in this model exists because for the board composition to change, it would take several election cycles.

Other mechanisms which may be used by firms include supermajority voting requirements. These require major corporate decisions, like mergers or bylaws amendments, to obtain a higher percentage of shareholder approval, usually at around 80% or 90%. This ensures that no shareholder or small group can enforce major changes without the majority's consent. For example, ExxonMobil has supermajority vote requirements for major actions such as mergers, making it harder for activist investors or potential acquirers to take control without huge support from other shareholders. Similarly, Chevron uses supermajority voting on important decisions as a means of effectively shielding its strategic course from unilateral changes by any minority group.

Also, a poison put is an indenture of bond agreements which enables the bondholders to exercise the option of demanding early debt repayment when a firm experiences a change in control. Therefore, this mechanism increases the financial cost of entry barriers that potential acquirers are likely to incur due to their likely requirement for early payment of these debts. For example, Ingersoll Rand utilized poison put provisions against hostile acquisitions. If an unwanted acquirer were to take control of the company, bondholders would have the right to demand early repayment, which would increase the complexity and cost of the acquisition.

Another example is Clear Channel Communications (as it was then known), now iHeartMedia, which used poison put provisions when it was a publicly traded company. These made hostile takeovers much more expensive, as the financial consequences of such a takeover would greatly increase.

The right of first refusal ensures that existing shareholders are given the privilege to buy their shares before an outside party may. This option allows current shareholders to maintain the proportionate percentage ownership and ensures they have some say in deciding the future sale of shares for distribution, keeping the company protected from unwanted interference from outsiders as well as attempted takeovers.

Overall, these strategies reflect the prudent initiative of these companies to maintain control and protect against a potential takeover threat and, therefore, enable them to concentrate on their respective core business issues.